Medicaid spending in the United States has been rising at an alarming rate, primarily due to increasing prescription drug prices. According to CMS, Medicaid spending reached nearly $629.3 billion in 2018, accounting for almost 62 percent of the federal budget. This figure is expected to grow annually at a rate of 5.7 percent for the next 10 years and reach $1 trillion by 2026, according to government actuaries. CMS has undertaken stringent measures to curtail prescription drug expenditures in the recent past. In this direction, the organization has provided consent to state Medicaid programs to engage in outcome-based contracts with pharma companies. In these contracts, rebates and formulary decisions are tied to the drug’s outcomes. If the drug fails to meet claimed outcomes the state can negotiate hefty discounts with the pharma companies.

The story so far…

Oklahoma and Michigan have received CMS approval to pursue outcomes-based contracts with pharma companies. The Oklahoma Health Care Authority together with Pharmacy Management Consultants (the PBM for Oklahoma Medicaid) had initiated talks for OBCs with nearly 20 companies in late 2016. In 2018, after receiving a formal approval, state authorities had finalized three OBCs with smaller drugmakers: Alkermes for Aristada; with Melinta for Orbativ; and Eisai for Fycompa. The state is in talks with several other companies to engage in similar contracts.

What is in it for the pharma companies?

Outcome-based contracts with pharma companies have been a buzz word in the U.S. healthcare system for a long time now, but despite this, there were no contracts signed by government health insurance programs. The reluctance to participate in an agreement could be due to Medicaid Best Price and Multistate Purchasing Pool, two policies that ensure drugs are available to beneficiaries at the lowest price, which could result in a meager profit to the manufacturer. This could be the reason why Oklahoma managed to sign deals with only three small drug manufacturers so far and has not succeeded with the larger firms.

However, these contracts can be beneficial to pharma companies as they can secure a position on the state's preferred formulary if clinical efficacy is shown. Important factors for the pharma companies to consider include demographic conditions such as the state’s uninsured population, utilization trends, and disease prevalence.

Looking ahead

CMS data states that between 2012 to 2016, Medicaid drug cost spending was highest for ADHD, HIV, and antipsychotic agents. It’s possible, therefore, new OBCs could stem from these therapy areas as well. Also, OBCs can eliminate restrictions placed on certain drugs which would secure them a preferred status compared to other drugs within the same therapy area.

There is speculation Colorado could be next in line to seek permission to engage in OBCs. It remains to be seen if other states will follow suit and engage in OBCs moving forward.

Lonita P. Lobo is an associate analyst with Decision Resources Group. Follow her on Twitter @lloboDRG.

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